How financial interest charges differ from interest charges on technical debt

Last updated on July 7th, 2021 at 02:55 pm

Second only to the term debt, the term interest is perhaps the most common financial term in the technical debt literature. In the financial realm, interest charges are the cost of using money. Usually, we express interest charges as a percentage rate per unit time. By contrast, metaphorical interest charges (MICs) on technical debt work differently. Failure to fully appreciate that difference can create problems for organizations as they try to manage their technical debt.

The notion of interest is deep in our culture. We understand it well. But the way we understand it corresponds to fixed or slowly varying interest rates. This understanding biases our perception of technical debt.

The root of the problem

Because we’re so familiar with financial interest, we perceive the elements of technical debt as imposing a cost that’s a relatively stable fraction, per fiscal period, of the initial MPrin. This belief doesn’t correspond to the reality of technology-based systems, which are the targets of the technical debt metaphor.

MICs on technical debt differ from the interest on financial debt in two ways.

MICs depend strongly on whether and how the people of the enterprise interact with the assets bearing the technical debt.

The MICs on technical debt include the value of opportunities lost (opportunity costs). These losses are due to depressed productivity and reduced organizational agility.

Neither of these factors has a financial analog. In finance, interest charges depend solely on a mathematical formula involving the interest rate and principal.

Last words

In the next few posts, I’ll explore the properties of metaphorical interest charges. This investigation helps clarify how they differ from financial interest charges. It also clarifies how that difference contributes to difficulties in managing technical debt.

The Principal Principle is that a focus on the metaphorical principal of a technical debt can be your undoing. Focus on the metaphorical interest charges. Drive them to Zero and keep them there.

Misunderstandings about the metaphorical interest charges on technical debt are costly. They prevent us from exploiting the properties of technical debt that reduce carrying costs and retirement costs. And the misunderstandings arise from the fact that the technical debt metaphor is only a metaphor—technical debt and financial debt are different.

The metaphorical interest charges (MICs) and metaphorical principal (MPrin) of a particular class of technical debt can change as a result of retiring other seemingly unrelated classes of technical debt. In most cases, engineering expertise is required to determine technical debt retirement strategies that can exploit this property of technical debt.

Unlike financial debt, for technical debt there are no legally required reports or disclosures. We can sometimes estimate MICs, but most organizations don’t track the data necessary to estimate MICs with useful precision. Indeed, developing useful estimates is often technically impossible.

Rescheduling interest payments on financial debt is possible only by prearrangement or in bankruptcy, but MICs on technical debt can often be rescheduled by rescheduling work that might incur them. This is useful when we plan to retire assets bearing technical debt, because their technical debt vanishes.